As Auto Loan Terms Lengthen Consumers Less Likely to Complete Their Loans to Term, New TransUnion Study Finds

A new study from TransUnion (NYSE:TRU) found that even as the term of new auto loans has increased, the duration of time a consumer remained in these loans has declined.

The study found that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.

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The study found that, despite the proliferation of longer loan terms, auto loan duration—the length of time a consumer keeps a loan and such loan remains in a lender’s portfolio—has declined. For auto loans originated in 2012, the average spread between term and duration has grown by nearly one month compared to loans originated in 2010. The study explored loans in this period to provide sufficient time for the loans to mature to payoff.

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“In recent years, longer-term auto loans have grown in popularity as consumers aim to keep monthly payments at a certain threshold. However, our study found that consumers are keeping their loans for a shorter period – a likely result of the low interest environment that has allowed more borrowers to refinance their loans.”

Jason Laky, senior vice president and automotive business leader for TransUnion

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This trend is important for lenders, because as borrowers remain in their auto loans about one month less, lenders may not be capturing the benefits of more payments and greater interest income they might expect from longer-term loans.

TransUnion’s study found that auto loan terms between 73 and 84 months have more than doubled between 2010 and 2015. One quarter of all loans originated in Q3 2015 were between 73 and 84 month terms, compared to just 10% in Q3 2010.

TransUnion also found that even as average new auto loan amounts increased between 2010 and 2015, the average monthly payment declined as consumers selected extended terms. In Q3 2015, the average new auto loan amount was $21,368, compared to $18,008 in Q3 2010. By the third quarter of 2015, the average new auto loan payment had declined to $398 per month from $420 per month in Q3 2010.

Longer Terms Lead to More Delinquency for Consumers with Squeezed Cash Flow

Even with smaller monthly payments, the study found that consumers with longer loans are more likely to be seriously delinquent (defined as ever 60 days or more past due) than borrowers with shorter terms, even when controlling for credit risk score.

Serious Delinquency Rates for Auto Loans by Term

Loan Term

Risk Tier

Subprime

Prime

Super prime

49-60 months

22.4%

3.4%

0.4%

61-72 months

22.8%

5.0%

0.9%

73-84 months

30.7%

7.1%

1.8%

“Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles,” said Laky. “However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans. We encourage lenders to use readily available risk analysis tools to identify borrowers who are more likely to go delinquent with an extended term, to ensure consumers are receiving loans that they can manage.”

TransUnion’s study also revealed that the risk from longer-term loans lessened when consumers had sufficient cash flow for a new auto loan. TransUnion used its CreditVision® aggregate excess payment (“AEP”) algorithm, which incorporates monthly payments from mortgages, credit cards, student loans and other debt obligations, to determine a consumer’s capacity to afford a new auto loan payment. The study found that across all risk tiers, consumers with a positive AEP—meaning they have money available after their monthly minimum payments are made—performed better. Consumers across all risk tiers who had negative AEP values were more likely to be delinquent on their auto loans.

Delinquency Rates and AEP of Loans Originated between 73 and 84 Months

Aggregate Excess Payment

Risk Tier

Subprime

Prime

Super prime

Positive

23.3%

5.0%

1.4%

Negative

30.0%

8.5%

2.6%

“Aggregate excess payment is a powerful, predictive tool for determining whether a borrower is likely to repay a loan,” added Laky. “Lenders can use solutions such as CreditVision aggregate excess payment to understand the differences between consumers who choose a longer loan term and those who need a longer auto loan term.”

Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.